Though trading near its 52-week high, InvenSense (NYSE:INVN) has tremendous upside potential and is well worth the buy. The company recently settled litigation with STMicroelectronics (NYSE:STM) and is consequently poised to see great growth. Despite the fact that most of the terms of this settlement are being kept secret, what has been disclosed implies that InvenSense will see a significant increase in revenue and innovation over the coming years, creating an upside that may lead to more profits and even a potential acquisition.


source: InvenSense

EPS increase
In the Q&A portion of its earnings call, InvenSense management stated that its projections included $3 million-$5 million in legal fees each quarter for the foreseeable future. Given an average net income of $13.5 million over the last four quarters, a $3 million-$5 million increase would add from 22%-37% to the company's bottom line. With 87.46 million shares outstanding, this would bring an extra $0.13-$0.22 of EPS each year.

IP expansion
One of the only other parts of the settlement revealed was a cross-licensing agreement. The agreement dictates that, among other patents, STMicro is allowed to freely use InvenSense's proprietary manufacturing process, which will help the company reduce production costs. Conversely, InvenSense can now use IP from any of STMicro's near 1,000 patents, freeing up the company's ability to produce cutting edge technology. With the dawn of "wearables," this could put the already well-positioned InvenSense in an even better spot to grow.

Wearable tech
Currently, InvenSense is leading the way in wearable technology. Microchips made by the company have already been built into Google (NASDAQ:GOOGL) Glass and Samsung's (NASDAQOTH:SSNLF) Galaxy Gear Smart Watch. With its recent introduction of the SoC, or System-on-Chip, InvenSense has created a way for mobile devices to do environmental monitoring without using the main processor. In other words, this chip saves quite a bit of battery power. This technology was made possible through the acquisition of Analog Devices' microphone unit, which serves to add to InvenSense's impressive IP portfolio.

Over the next few years, the wearable device market is expected to explode. According to Juniper, by 2018 the industry will be worth $19 billion, up from $1.4 billion this year. As this explosion occurs, InvenSense can expect revenue to grow substantially and its patent portfolio to become increasingly valuable. As such, it may become a perfect acquisition target.

Who might buy?
The conversation is made very interesting by the fact that Samsung is indicating it may wage a bit of a patent war. Consider the following: First, the company signed a 10-year cross-licensing agreement with Google, giving both companies access to the entire patent portfolio of the other . Similarly, Samsung made what is effectively the same deal with Cisco. Rumor has it that these deals are the first of several that will enable the newly forming alliance to fight the Rockstar Consortium, a group whose members include Apple, Microsoft, BlackBerry, Ericsson, and Sony. If this battle escalates, InvenSense's portfolio would be something either side would want to add to their patent arsenal. Even if a stand-off does not ensue, Google and Apple have already proven they are both willing to pay hefty sums of money for mobile patents.

There is another, rather unexpected possible buyer: Intel. The organization has long been attempting to break into the mobile market and has thus far failed to do so. During this year's Consumer Electronics Show, Intel delivered a key note speech that focused almost entirely on wearable devices, indicating a shift away from the smartphone and tablet market and toward what is perceived to be the future of tech. Intel may be very interested in giving itself a competitive advantage in the emerging wearable device market through the purchase of InvenSense's patent portfolio.

The bottom line
The bottom line is this: InvenSense's upside is huge. The company can now count on an extra $3 million-$5 million per quarter, can leverage almost 1,000 new patents, and can expect revenue to grow as the wearable device market starts to explode. Further, as its patents become more valuable, InvenSense may become a prime acquisition target for companies looking to take advantage of emerging product trends. My suggestion: buy some shares of InvenSense while they're still cheap.

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Scott Inderbitzen has no position in any stocks mentioned. The Motley Fool recommends Google and InvenSense. The Motley Fool owns shares of Google and InvenSense. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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